Report Sparks Change at Fannie Mae

In fact, Raines is mentioned by name just eight times in the report, and most of those are in footnotes. By comparison, Howard's name comes up 100 times.

This is does not mean, however, that Raines is in the clear. OFHEO is not done with its investigation, and the Securities and Exchange Commission is just beginning its own inquiry.

Congressional critics of Fannie Mae and its corporate sibling, Freddie Mac, plan a new round of hearings into the accounting irregularities that have surrounded both mortgage firms. The hearings no doubt will spark cries for Raines to go, along with other top executives.

Some think Raines may have sealed his fate by his staunch defense of Fannie's bookkeeping, even after it was revealed that Freddie had been playing games with its accounting treatment for derivatives.

Derivatives are sophisticated financial instruments that Fannie and Freddie rely on to hedge their exposure to interest rates fluctuations, something that can wreak havoc with the values of their mortgage-related investments.

Pressure

There also may be pressure from institutional investors for a top-level shake-up at Fannie Mae, just like the one that occurred at Freddie after its similar accounting scandal last year. After many months of blithely ignoring the regulatory inquiry, investors are now jumping out of the company's stock.

Two Wall Street analysts downgraded the stock early Thursday after reading the OFEHO report, a sign of waning confidence on the Street. Sandler O'Neill analyst Mike McMahon, a long supporter of Fannie's management offered a sobering assessment of management's predicament.

"The tone of the OFEHO report is highly critical and will likely be hard for management to defend, which might explain the lack of any comments from management to date," McMahon wrote in a research note in which he downgraded the stock to hold.

Late Thursday, the credit rating agency Standard & Poor's put Fannie's subordinated debt on watch for a possible downgrade from its current double-A rating because of the accounting scandal. S&P's action, however, does not affect Fannie's triple-A rated unsecured debt.

Even so, cracks may already be developing in the relationship between Fannie's board and management. So far, the only official response to the OFEHO report has come from Ann Korologos, presiding director of Fannie's board.

In the post-Enron world, though, it's hard for a CEO to survive a deluge of negative headlines, especially if it keeps eating away a company's share price.

>To order reprints of this article, click here: Reprints